Search

Thursday, 12 July 2012

Who gets to pay when an innovation-driven project fails?

Decided last month by Mr
Justice Hamblen in the Commercial Division of the Queens Bench, England and
Wales, Brown & others v Innovatorone Plc & others[2012] EWHC 1321
(Comm) is a complex but instructive case on the question of who gets to
pay when an innovation-driven project fails.

Brown and the other claimants brought this action against the defendants
following the failure of a total of 19 schemes (16 of which were LLPs, the
other three being regular partnerships), all of which had been promoted by the
issue of an information memorandum which invited investors to become paying
partners in a vehicle for the acquisition and exploitation of rights to
information and communication technology (ICT). The defendants were,
respectively the managing directors and administrators of the partnerships and
schemes, the architect of the schemes, a technology vendor, a firm of
solicitors and the partners in that firm. The schemes promoted a tax incentive,
gearing, profit incentive and a borrowing ability. The partners successfully
obtained the full first year tax relief. This resulted in substantial
payment rebates being made.

However, in 2003 the schemes
were investigated by the Inland Revenue, which was dissatisfied with the
commerciality of the schemes and considered that the technology had not been
exploited. The revenue was prepared to settle the matter on the basis that the
tax relief would only be available in relation to the capital contribution made
by each partner, rather than the grossed up amount of the investment. That
offer was accepted by most of the partners -- which meant they had to find
funds to repay the revenue.

Brown and his investment-minded colleague argued contended that the schemes
were established with a view to defraud as there were no technology rights and
the operators had no intention to exploit the technology rights; that
fraudulent or negligent misrepresentations were made in the information
memorandums and other documents; that their payments of subscription money into
the solicitor's client account were subject to aQuistclose
-type trust, for their benefit; that the defendants had dishonestly
assisted in breaches of trust; that Brown was entitled to recover, under the
Financial Services and Markets Act 2000 s.26 or s.30(2), money paid under the
agreements; that the defendants owed a duty of care in relation to the
promotion of the schemes and that the defendants had breached their fiduciary
duty.

After 60 days in court, in a 1,435 paragraph judgment Hamblen J added to the
investors' woes by dismissing their action. In his view:

There
were genuine technology rights in relation to each scheme, and the fact
that there had been a failure to carry out due diligence on the technology
vendors' business plans and income figures that did not mean that the
technologies had no value. They were of real value, which was more than
minimal. The technologies had real exploitation prospects and there was a
real intention to exploit the rights. The price negotiations for the
acquisition of the technology were genuine negotiations and the
acquisition price was agreed as part of an arm's length transaction.

There
was no actionable misrepresentation of fact, since the defendants' statements
on which Brown and the other claimants relied were merely statements of
opinion or expectation. In their context they could not be reasonably
construed as being anything else.

Before
Brown and the other subscribers became partners, their subscription money
was subject to a Quistclose trust -- but this trust in their favour came
to an end when they became subscribers.

On the
facts there had been no dishonesty on the defendants' apart, and no breach
of trust.

The
schemes were collective investment schemes under s.235(1) of
the Financial Services and Markets Act 2000 since they involved
activities and investments that were controlled under that Act --
and the financial promotion restrictions imposed by that Act had been
breached. However, the claimants' monetary claim under ss 26 and 30
of that Act could not be made against anyone other than the LLP.

Several
factors militated against the imposition of a duty of care: the schemes
were commercial in nature; they were not directed at people of modest means;
the claimants would have had advice from their independent financial
advisors; and there were no actions for breach of statutory duty under
the the Financial Services and Markets Act 2000.

The
claimants' fiduciary duty argument was upside down since it was not
the LLP that owed them a fiduciary duty but the partners who owed a
fiduciary duty to the LLP.

In general terms, the morals of
this case can be stated quite simply: when investing in any new
technology, it's as important to do one's due diligence on your prospective
partners and their business plans as it is to check out the technology in which
you propose to invest; ask yourself clearly whether you are relying on
statements of fact or on representations of a vaguer nature -- and think twice before
seeking to recover your losses through High Court litigation.

This post by Jeremy Phillips first appeared on the IPFinance blog and is reproduced here with permission and thanks.

For an overview of Amoo Venture Capital Advisory's services to investors click here

Wonderful beat ! I wish to apprentice while you amend your site, how could i subscribe for a blog website? The account aided me a acceptable deal. I had been tiny bit acquainted of this your broadcast offered bright clear concept

Try not to be tricked. An insolvency or other credit issues can be no picnic for a credit report. That does not really mean you can't arrive an insolvency auto credit. You may need to venture back and not hope to owning a fantasy auto directly after chapter 11, yet given a respectable pay and different signs of soundness, finding an auto credit ought not be that huge of arrangement. payday loans chicago

On the off chance that you are taking a settled rate decision, the financing cost on the home credit will bear on a similar completely through the whole term of the advance. While contract rates are directly low, home value credits are probably going to be somewhat higher than first home loans. In any case, these credits introduce comparatively low rates. www.usapaydayloanstore.com/chicago

Good day! I could have sworn I’ve visited this web site before but after browsing through many of the posts I realized it’s new to me. Regardless, I’m definitely happy I discovered it and I’ll be bookmarking it and checking back often! download from spotify online